The Most-Anticipated Stock Market Crash

US equities have been going up for so long that most investors -- especially
those who were only recently enticed into the casino by the apparently easy
money on offer -- have trouble remembering the last time it was possible to
lose big in stocks.

Along the way, a
whole slew of indices and indicators have drifted into their historical
danger zones, prompting many in the financial media to address the subject,
either by making explicit predictions (YouTube is now full of recent videos
with pundits hammering the "get out while you can" theme) or considering
the issue from unusual angles. Here's a good example of the latter from MarketWatch's
L.A. Little:

Last week, U.S. equities dropped 2% to 3%, depending on what index you monitor.
That had the financial columns full of crash warnings about the coming plunge.
Now to be fair, we have seen these headlines for a while now, so it's not like
they just suddenly began to appear, but the fact that there actually was some
selling added a little credence to the crash worries. Sure there were a few
voices of reason, but for the most part, the coming declines were all but set
in stone as far as most commentators were concerned. But is that really the
case? Is it finally time for a crash?

A year ago, almost to the day, I penned a piece here on MarketWatch that
outlined the technical structure that precedes a crash. You can read that
original column here and
the follow-up
column as well. Back then, the crash chorus was rising as well. The most
important points of the columns were:

Market crashes have a technical structure that forms prior to the crash

Significant market declines (not crashes) also have the same exact structure

The technical structure is a necessary but not a sufficient condition

That last point is a salient one. What it says is that given historical
data, large declines and crashes have a structure we can identify, but just
because the structure is present does not necessarily mean those declines
will be realized.

What is the structure? It is the break of multiple swing points on multiple
timeframes across the major indexes and, in case you are wondering, we don't
have that yet . In fact, we haven't seen that since that piece was penned
a year ago. We came close a couple of times -- once late last year and again
earlier this year, but so far, nothing yet. Remember, even when we do get
the breaks and the trend transitions that they imply, it still doesn't follow
that we will necessarily get a large decline or crash -- it just raises the
possibility and the resultant odds.

So what would it take to get a larger decline at this juncture? If you take
the weakest index, the Russell 2000, it would need to decline another 3.7%,
which is equal to another decline of equal size to last week's push lower.
That would bring it to the brink.

The same is true of the S&P 500 as a decline of another 3.5% from Monday's
closing levels would also bring it to breakdown levels

The conclusion of the MarketWatch analysis is that US equities are one really
bad day (or another week like last week) from falling off of the table. Without
pretending to know the future, this seems technically reasonable, since big
trends tend to continue once they get going, and psychologically consistent,
since so many people are waiting for such an occurrence and are presumably
primed to sell and/or short this market in a big way.

In any event, a stock market correction isn't much of a story, since there
have been dozens of them in the average adult's lifetime. Way more interesting
are 1) the reasons for the long bull market and 2) the likely response of the
world's governments to a, say, 20% decline in the average stock. In a nutshell:

The S&P 500 has gone an amazing 33 months without a 10% correction because
the world's central banks have pushed interest rates down to levels that make
equities the only game in town. Major corporations now find it more profitable
to borrow cheap money and buy back their stock than to actually invest in their
businesses. This year they'll devote nearly a trillion dollars to this "strategy."

Central banks, meanwhile, are beginning to invest in equities directly, something
they've never before done on this scale. In both cases, the buyers are not
bothering to analyze their purchases, they're just steadily accumulating. This
consistent inflow of funds gives the market an upward bias and stops minor
corrections before they start.

As for how the word's governments will react to a serious equities bear market,
that's easy. They'll do what they've done for the past 30 years: pump more
newly-created currency into the financial markets. What was once known as the "Greenspan
put" is now a global guarantee of paper profits in risky assets. The European
Central Bank, People's Bank of China and Bank of Japan will all join the Fed
in trying to stop a correction from turning into something worse. And in the
process they'll lead speculators to even more bizarre flights of fancy in whatever
sector is hot next time around.

This will go on until the ammo stops working. That is, when fiat currencies
stop functioning as money and the world's central banks lose the ability to
fool us by manipulating what used to be free markets.

John Rubino edits DollarCollapse.com and has authored or co-authored five
books, including The Money Bubble: What To Do Before It Pops, Clean
Money: Picking Winners in the Green Tech Boom, The Collapse of the Dollar
and How to Profit From It, and How to Profit from the Coming Real Estate
Bust. After earning a Finance MBA from New York University, he spent the
1980s on Wall Street, as a currency trader, equity analyst and junk bond analyst.
During the 1990s he was a featured columnist with TheStreet.com and a frequent
contributor to Individual Investor, Online Investor, and Consumers Digest,
among many other publications. He now writes for CFA Magazine.